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One of the biggest issues in accounting today is Revenue Recognition. In its simplest terms, it means recording revenue in the period it is earned. Sounds simple, but for some companies it can be a huge issue. Let’s say you sell an annual membership in a club for $120 a year, billed and paid upfront. You can only recognize 1/12 of the annual membership revenue each month. Still simple, make a journal entry for $10 each month. But magnify it by 1000 members starting at different times of the year, leaving early or changing memberships, and it can get crazy very fast, more than even the best Excel spreadsheets can handle.
Proper revenue recognition has become so important that the Financial Accounting Standards Board (FASB), the industry’s regulatory body, has passed new standards that become effective in 2017. The new principal states that revenue is recognized when control of the goods or services transfers to the customer. This has very far reaching consequences, such as:
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Future training classes
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Bundled goods and services
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Software licenses
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Costs to acquire a customer (like sales commissions)
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Sales with future deliveries
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Annual contracts
The new standards can affect almost every industry and it doesn’t affect just revenue, but also associated costs. Most accounting firms have started to educate their clients and may even have special practice units to assist clients in making the transition from old rules to new ones.
The purpose of course, is to have more accurate and reliable financial statements that truly represent revenue and associated costs that have actually been earned by companies. Better financial statements mean better information, and in the end, better decisions by management, investors and others.
Gravity Software® (Gravity) introduced its Revenue and Expense Recognition module that can automate the whole process and makes it as simple as creating an invoice. Based on recognition templates, Gravity will create the deferral schedules automatically. All you have to do is post the monthly entries.
Gravity helps companies grow by unlocking information and reducing friction. Gravity is a robust mid-market accounting software written on the Microsoft Dynamics 365 (aka Microsoft CRM) platform. Gravity’s goal is to provide the features growing companies need while being easy to use and easy to implement. Learn more and schedule your online demo today! My business is connected. Is yours?
Gravity Software
Better. Smarter. Accounting.
